Question #30 - Reading 23 Residual Income Valuation

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 18

Status: Correct

Correct Answer: A

Shared Context

- Jon is comparing the different equity valuation models. He believes that the residual income model offers some advantages to the analyst over the other models. Which of the following is an advantage of the residual income model? A) It does not require the clean surplus relationship to hold. B) The intrinsic value is not dominated by the terminal value. C) No adjustments to the financial data is required.

Question

Use the information above and the residual income model to calculate the implied growth rate in Entrebus Inc.

Answer Choices:

A. 13.33%

B. 7.67%

C. 9.67%

Explanation

Growth rate using the RI model would be: g = 9.67% Rather than learning yet another formula, simply substitute known values (g) from the question into the equation in question above and solve for MV0.

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